Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - Zero Gravity Solutions, Inc.ex_215180.htm
EX-31.1 - EXHIBIT 31.1 - Zero Gravity Solutions, Inc.ex_215179.htm
 

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

 

 

For the quarterly period ended June 30, 2019

 

 

 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

 

 

For the transition period from ___________to ____________

 

Commission File Number: 000-55345

 

ZERO GRAVITY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

 

 

NEVADA

46-1779352

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

 

190 NW SPANISH RIVER BOULEVARD, SUITE 101, BOCA RATON, FLORIDA 33431

(Address, including zip code, of principal executive offices)

 

(561) 416-0400

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

 Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☐ No ☒ The Company has not filed its Quarterly Report on Form 10-Q for the quarterly periods ended September 30, 2019, March 31, 2020, June 30, 2020 and September 30, 2020 and its Annual Report on Form 10-K for the year ended December 31, 2019.

  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☐ No ☒ See above

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of October 29, 2020, the issuer had 39,690,868 shares of common stock issued and outstanding.

 

 

 

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

2

 

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

2

 

 

Condensed Consolidated Balance Sheets at June 30, 2019 (unaudited) and December 31, 2018

2

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

3

 

 

Condensed Consolidated Statements of Changes in Stockholders' Deficit for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

4

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited)

5

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

Item 3. Quantitative & Qualitative Disclosures about Market Risks

42

 

 

Item 4. Controls and Procedures

43

 

 

PART II OTHER INFORMATION

44

 

 

Item 1. Legal Proceedings

44

 

 

Item 1A. Risk Factors

44

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

Item 3. Defaults upon Senior Securities

44

 

 

Item 5. Other Information

44

 

 

Item 6. Exhibits

45

 

 

 
 

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

 

 

Statements in this report may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions, or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this report, including the risks described under "Risk Factors" and any risks described in any other filings we make with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018.

 

These factors include, among others:

 

 

● current or future financial performance;
● management’s plans and objectives for future operations;
● uncertainties associated with product research and development;
● uncertainties associated with dependence upon the actions of government regulatory agencies;
● product plans and performance;
● management’s assessment of market factors; and
● statements regarding our strategy and plans.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this report and include information concerning possible or assumed future results of our operations, including statements about business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts. These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties, and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. All subsequent written and oral forward-looking statements concerning other matters addressed in this report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this report. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report.

 

Management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an on-going basis, we evaluate these estimates, including those related to useful lives of property and equipment, the allowance for doubtful accounts and stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. CONDENSED Consolidated Financial Statements

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets

 

   

June 30, 2019

   

December 31, 2018

 
   

(Unaudited)

         
                 

Assets

 
                 

Current Assets

               

Cash and cash equivalents

  $ 1,782,954     $ 43,683  

Accounts receivable - net

    2,275       342  

Prepaid and other

    264,859       314,645  

Inventory

    26,326       103,142  

Total Current Assets

    2,076,414       461,812  
                 

Property and Equipment - net

    73,406       85,523  
                 

Other Assets

               

Inventory

    220,495       -  

Deposit

    4,817       4,817  

Total Other Assets

    225,312       4,817  
                 

Total Assets

  $ 2,375,132     $ 552,152  
                 

Liabilities and Stockholders' Deficit

 
                 

Current Liabilities

               

Accounts payable and accrued expenses

  $ 493,884     $ 544,659  

Accounts payable and accrued expenses - related parties

    -       127,480  

Accrued interest

    36,941       21,262  

Accrued interest - related parties

    141,202       100,919  

Deferred revenue

    -       250,000  

Deferred compensation - related party

    -       12,500  

Insurance financing liability

    105,025       223,482  

Notes payable - net

    -       191,108  

Notes payable - related parties - net

    99,214       1,058,621  

Convertible notes payable - net

    151,503       8,947  

Convertible notes payable - related parties

    -       500,000  

Derivative liability

    216,000       114,000  

Total Current Liabilities

    1,243,769       3,152,978  
                 

Long-Term Liabilities

               

Convertible notes payable - Series A, 10% - net

    339,112       -  

Convertible notes payable - Series A, 10% - related parties - net

    1,116,584       -  

Convertible notes payable - Series B, 12% - net

    56,013       -  

Convertible notes payable - Series B, 12% - related parties - net

    266,104       -  

Notes payable - net

    -       96,263  

Notes payable - related parties - net

    -       943,621  

Convertible notes payable - net

    -       356,794  

Convertible notes payable - related parties - net

    -       1,098,649  

Total Long-Term Liabilities

    1,777,813       2,495,327  
                 

Total Liabilities

    3,021,582       5,648,305  
                 

Commitments (Note 5)

               
                 

Stockholders' Deficit

               
                 

Common stock, $0.001 par value, 100,000,000 shares authorized 39,332,310 and 40,954,115 shares issued and outstanding at June 30, 2019 and December 31, 2018 respectively

    39,332       40,954  

Additional paid-in capital

    32,586,150       24,283,509  

Accumulated deficit

    (33,271,377 )     (29,420,616 )

Stockholders' deficit

    (645,895 )     (5,096,153 )

Non-controlling interest

    (555 )     -  

Total Stockholders' Deficit

    (646,450 )     (5,096,153 )
                 

Total Liabilities and Stockholders' Deficit

  $ 2,375,132     $ 552,152  

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

 

 

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Sales

  $ 4,923     $ 29,600     $ 49,418     $ 33,070  
                                 

Cost of sales

    6,327       4,727       33,640       5,277  
                                 

Gross profit (loss)

    (1,404 )     24,873       15,778       27,793  
                                 

Operating expenses

                               

General and administrative expenses

    987,884       1,160,825       1,874,596       2,570,597  

Research and development

    63,891       16,710       64,962       101,451  

Total operating expenses

    1,051,775       1,177,535       1,939,558       2,672,048  
                                 

Loss from operations

    (1,053,179 )     (1,152,662 )     (1,923,780 )     (2,644,255 )
                                 

Other income (expense) - net

                               

Interest expense

    (245,181 )     (72,403 )     (380,333 )     (133,502 )

Amortization of debt discounts

    (1,336,868 )     (49,320 )     (1,534,203 )     (72,962 )

Change in fair value of derivative liability

    15,000       -       (13,000 )     -  

Loss on disposal of asset

    -       -       -       (343 )

Total other income (expense) - net

    (1,567,049 )     (121,723 )     (1,927,536 )     (206,807 )
                                 

Net loss including non-controlling interest

  $ (2,620,228 )   $ (1,274,385 )   $ (3,851,316 )   $ (2,851,062 )
                                 

Non-controlling interest

    (283 )     -       (555 )     -  
                                 

Net loss available to common stockholders

  $ (2,619,945 )   $ (1,274,385 )   $ (3,850,761 )   $ (2,851,062 )
                                 

Loss per share - basic and diluted

  $ (0.07 )   $ (0.03 )   $ (0.10 )   $ (0.07 )
                                 

Weighted average number of shares - basic and diluted

    39,968,574       40,808,976       40,491,752       40,792,224  

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

 

Consolidated Statements of Changes in Stockholders’ Deficit

For the Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

 

                   

Additional

                 

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Controlling

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Interest

   

Deficit

 
                                                 

December 31, 2017

    40,650,397     $ 40,650     $ 21,970,266     $ (23,980,220 )   $ -     $ (1,969,304 )
                                                 

Common stock issued for cash - net of offering costs of $1,680 ($2.97/share)

    55,334       56       164,266       -       -       164,322  
                                                 

Warrants issued for services

    -       -       57,947       -       -       57,947  
                                                 

Warrants issued as loan costs (debt discount)

    -       -       70,897       -       -       70,897  
                                                 

Stock options issued for services

    -       -       71,254       -       -       71,254  
                                                 

Net loss - three months ended March 31, 2018

    -       -       -       (1,576,677 )     -       (1,576,677 )
                                                 

March 31, 2018

    40,705,731       40,706       22,334,630       (25,556,897 )     -       (3,181,561 )
                                                 

Common stock issued for cash - net of offering costs of $24,000 ($3/share)

    248,384       248       720,904       -       -       721,152  
                                                 

Warrants issued for services

    -       -       127,029       -       -       127,029  
                                                 

Warrants issued as loan costs (debt discount)

    -       -       475,114       -       -       475,114  
                                                 

Stock options issued for services

    -       -       75,023       -       -       75,023  
                                                 

Net loss - three months ended June 30, 2018

    -       -       -       (1,274,385 )     -       (1,274,385 )
                                                 

June 30, 2018

    40,954,115     $ 40,954     $ 23,732,700     $ (26,831,282 )   $ -     $ (3,057,628 )
                                                 
                                                 
                                                 

December 31, 2018

    40,954,115     $ 40,954     $ 24,283,509     $ (29,420,616 )   $ -     $ (5,096,153 )
                                                 

Common stock issued for services ($1.78/share)

    45,000       45       79,905       -       -       79,950  
                                                 

Common stock issued upon cashless exercise of warrants ($0.001/share)

    306,195       306       (306 )     -       -       -  
                                                 

Warrants issued for services

    -       -       112,651       -       -       112,651  
                                                 

Stock issued for loan costs ($1.80/share)

    2,000       2       3,606       -       -       3,608  
                                                 

Non-controlling interest

    -       -       -       -       (272 )     (272 )
                                                 

Net loss - three months ended March 31, 2019

    -       -       -       (1,230,816 )     -       (1,230,816 )
                                                 

March 31, 2019

    41,307,310       41,307       24,479,365       (30,651,432 )     (272 )     (6,131,032 )
                                                 

Common stock issued for services ($1.80/share)

    25,000       25       44,975       -       -       45,000  
                                                 

Cancellation and return of shares from former related party ($0.001/share)

    (2,000,000 )     (2,000 )     2,000       -       -       -  
                                                 

Warrants issued for services

    -       -       26,161       -       -       26,161  
                                                 

Warrants issued and benefical conversion feature - debt discount - Series A, 10%, and Series B, 12%, convertible notes

    -       -       8,024,032       -       -       8,024,032  
                                                 

Stock options issued for services

    -       -       9,617       -       -       9,617  
                                                 

Non-controlling interest

    -       -       -       -       (283 )     (283 )
                                                 

Net loss - three months ended June 30, 2019

    -       -       -       (2,619,945 )     -       (2,619,945 )
                                                 

June 30, 2019

    39,332,310     $ 39,332     $ 32,586,150     $ (33,271,377 )   $ (555 )   $ (646,450 )

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations

(Unaudited)

 

   

For the Six Months Ended June

30,

 
   

2019

   

2018

 
                 
                 

Operating activities

         

Net loss - including non-controlling interest

  $ (3,851,316 )   $ (2,851,062 )

Adjustments to reconcile net loss to net cash used in operations

               

Bad debt

    2,712       4,060  

Depreciation and amortization

    12,117       13,168  

Common stock issued for services

    124,950       -  

Common stock issued for loan costs

    3,608       -  

Warrants issued for services

    138,812       223,119  

Stock options issued for services

    9,617       146,277  

Non-cash penalty on convertible note payable

    10,000       -  

Loss on disposal of asset

    -       343  

Amortization of debt discount and loss on debt extinguishment

    1,534,203       72,962  

Change in fair value of derivative liability

    13,000       -  

Advance on future royalties - related parties reserve

    -       129,580  
Impairment of inventory     10,286       -  

Impairment expense

    -       203,208  

Changes in operating assets and liabilities

               

(Increase) decrease in

               

Accounts receivable

    (4,645 )     (26,592 )

Prepaid and other

    49,786       106,733  

Inventory

    (153,965 )     3,887  

Deposits

    -       (200 )

Increase (decrease) in

               

Accounts payable and accrued expenses

    112,019       118,846  

Accounts payable and accrued expenses - related party

    -       4,716  

Accrued interest

    15,679       27,187  

Accrued interest - related party

    40,283       5,000  

Advance on future royalties - related parties

    -       (13,347 )

Deferred revenue

    (43,200 )     -  

Deferred compensation - related party

    (12,500 )     -  

Net cash used in operating activities

    (1,988,554 )     (1,832,115 )
                 

Financing activities

               

Proceeds from issuance of Series B, 12%, convertible notes payable

    762,500       -  

Proceeds from issuance of Series B, 12%, convertible notes payable - related parties

    2,299,927       -  

Proceeds from convertible note payable

    94,500       -  

Proceeds from notes payable

    50,000       200,000  

Repayments of notes payable

    (50,000 )     -  

Proceeds from notes payable - related party

    789,000       2,200,000  

Repayments of notes payable - insurance financing liability

    (118,457 )     (107,655 )

Repayments of notes payable - related party

    -       (300,000 )

Payments of debt offering costs - related parties

    (99,645 )     (66,000 )

Proceeds from sale of common stock

    -       911,154  

Payments of offering costs

    -       (25,680 )

Net cash provided by financing activities

    3,727,825       2,811,819  
                 

Net increase in cash and cash equivalents

    1,739,271       979,704  
                 

Cash and cash equivalents - beginning of period

    43,683       13,862  
                 

Cash and cash equivalents - end of period

  $ 1,782,954     $ 993,566  
                 

Supplemental disclosure of cash flow information

               

Cash paid for interest

  $ 16,043     $ 133,502  

Cash paid for income tax

  $ -     $ -  
                 

Supplemental disclosure of non-cash investing and financing activities

               

Conversion of debt into Series A, 10%, convertible notes

  $ 850,000     $ -  

Conversion of debt into Series A, 10%, convertible notes - related parties

  $ 4,889,001     $ -  

Conversion of accrued interest into Series A, 10%, convertible notes

  $ 162,794     $ -  

Conversion of accrued interest into Series A, 10%, convertible notes - related parties

  $ 127,480     $ -  

Conversion of prior deferred revenue into Series A, 10%, convertible notes - related party

  $ 206,800     $ -  

Conversion of Series A, 10%, convertible notes and accrued interest into Series B, 12%, convertible notes

  $ 3,066,573     $ -  

Warrants issued as loan costs (debt discount) - Series A, 10%, and Series B, 12%, convertible notes

  $ 8,024,032     $ 546,011  

Debt discount recorded in connection with derivative liability

  $ 89,000     $ -  

Cancellation and return of shares from former related party

  $ 2,000     $ -  

Common stock issued upon cashless exercise of warrants

  $ 306     $ -  

Warrants issued as direct offering costs in the sale of common stock

  $ -     $ 5,771  

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

ZERO GRAVITY SOLUTIONS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

June 30, 2019

(Unaudited)

 

 

 

Note 1 - Organization and Nature of Operations and Basis of Presentation

 

Organization and Nature of Operations

 

Zero Gravity Solutions, Inc. (the “Company”) is an agricultural biotechnology company focused on commercializing technology derived from and designed for spaceflight with significant applications on Earth. These technologies are focused on improving world agriculture by providing valuable solutions to challenges facing humanity including threats to world agriculture and the ability to feed the world’s rapidly growing population.

 

The Company owns proprietary technology for its initial commercial product, BAM-FX® that can boost the nutritional value and enhance the immune system of food crops without the use of genetic modification. The Company’s focus is the commercialization of BAM-FX® in both domestic and international markets. The Company’s headquarters are located in Boca Raton, Florida. 

 

The Company operates through two subsidiaries: BAM Agricultural Solutions, Inc. a Florida corporation (“BAM”), which was formed in 2014, and Specialty Agricultural Solutions, Inc. (“SASI”), which was formed in 2018 and began operations in 2019. The Company owns 98% of SASI.

 

Another subsidiary of the Company, Zero Gravity Life Sciences, Inc., a Florida corporation (“ZGLS”), was formed by the Company in 2014. ZGLS is currently inactive.

 

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The COVID-19 pandemic has the potential to significantly impact the Company’s supply chain, distribution centers, or logistics and other service providers.

 

During the first quarter of 2020, the Company furloughed all employees other than the three executive officers due to the COVID-19 impact on its operations. Beginning in the second quarter of 2020 the Company began to remove certain employees from furlough that are key to ongoing operations. The Company is not able to estimate the duration of the pandemic or the potential impact on the business of disruptions or delays in shipments of product.

 

To date, the Company has experienced product shipment delays due to import restrictions imposed by countries in which the Company had customer purchase commitments. In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand for product and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly. 

 

Basis of Presentation

 

Management acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the consolidated results of its operations for the periods presented.

 

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions to Article 8-03 of Regulation S-X.

 

Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Certain information and note disclosure normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements.

 

These unaudited consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to the consolidated financial statements for the year ended December 31, 2018 of the Company which were included in the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission on October 17, 2019.

 

Liquidity, Going Concern and Management’s Plans

 

These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

 

As reflected in the accompanying unaudited consolidated financial statements, for the six months ended June 30, 2019, the Company had:

 

Net loss including non-controlling interest of $3,851,316; and

 

Net cash used in operations was $1,988,554

 

Additionally, at June 30, 2019, the Company had:

 

Accumulated deficit of $33,271,377,

 

Stockholders’ deficit of $646,450; and

 

Working capital of $832,645

 

The Company has cash on hand of $1,782,954 at June 30, 2019. Without significant cash collections from sale of product, given the Company’s current monthly cash used in operations, the Company has sufficient cash to operate for approximately six months without an additional capital raise or change to its business strategy and plan.

 

Although the Company intends to raise additional capital, the Company expects to continue to incur significant losses from operations and have negative cash flows from operating activities for the near-term and these losses could be significant as product development, regulatory, contract research, and technical marketing personnel related expenses are incurred.

 

The Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from the sales of its goods and services to achieve profitable operations. There can be no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flow and cash usage forecasts for the period ending June 30, 2019, and our current capital structure including equity-based instruments and our obligations and debts.

 

The Company has satisfied its obligations using cash from successful capital raising efforts through June 30, 2019, specifically, the issuance notes payable and convertible debt of $3,995,927 during the six months ended June 30, 2019; however, there is no assurance that such successful efforts will continue during the twelve months subsequent to the date these interim consolidated financial statements are issued.

 

The Company has executed product distribution agreements with domestic and international commercial agricultural distributors and generated initial product orders. Additional technical and marketing efforts must be devoted to those distributors to ensure the product is properly utilized and validated by end users. To fund these capital needs, the Company has and continues to raise capital through a private placement offering in connection with its investment banker and through its internal efforts, as well as through issuances of debt.

 

 

If the Company does not obtain additional capital, the Company will be required to reduce the scope of its business development activities or cease operations. The Company continues to explore obtaining additional capital financing and the Company is closely monitoring its cash balances, cash needs, and expense levels. 

 

These factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve month period subsequent to the date that these consolidated financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

 

Management’s strategic plans include the following:

 

Continuing to advance commercialization of the Company’s principal product, BAM-FX® in both domestic and international markets,

 

Pursuing additional capital raising opportunities,

 

Continuing to explore and execute prospective partnering or distribution opportunities; and

 

Identifying unique market opportunities that represent potential positive short-term cash flow.

 

 

Note 2 - Summary of Significant Accounting Policies

 

Principles of Consolidation and Non-Controlling Interest

 

These consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly-owned and majority owned subsidiaries. All intercompany transactions and balances have been eliminated.

 

The non-controlling interest in SASI is reported as Non-controlling interest in Total Stockholders’ Deficit of our Consolidated Financial Statements.

 

Business Segments and Concentrations

 

The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. The Company manages its business as one reportable segment and the unaudited consolidated financial statements are presented as one operating business segment. 

 

Customers in the United States accounted for 100% of our revenues. We do not have any property or equipment outside of the United States.

 

Use of Estimates

 

Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.

 

Significant estimates during the six months ended June 30, 2019 include allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of beneficial conversion features in convertible debt, valuation of loss contingencies, valuation of derivative liabilities, valuation of stock-based compensation and the valuation allowance on deferred tax assets.

 

 

Fair Value of Financial Instruments

 

The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.

 

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.

 

The three tiers are defined as follows:

 

 

Level 1 —Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;

 

 

Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and

 

 

Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.

 

The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.

 

Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values. See Note 4(D) for level 3 reconciliation of derivative liabilities.

 

The Company’s financial instruments, including cash, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At June 30, 2019 and December  31, 2018, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding financial instruments.

 

Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. At June 30, 2019 and December 31, 2018, the Company had cash equivalents of $250,085 and $0, respectively.

 

Accounts Receivable

 

Credit is extended to customers based on an evaluation of their financial condition and other factors. The Company does not require collateral. Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. Interest is not accrued on overdue accounts receivable.

 

Allowance for doubtful accounts was $2,370 and $0 at June 30, 2019 and December 31, 2018, respectively.

 

 

At June 30, 2019, two customers accounted for 28.5% of total gross accounts receivable. Each of these customers represented 17.5% and 11%, respectively. At December 31, 2018, two customers accounted for 100% of total accounts receivable. Each of these customers represented 78.1% and 21.9%, respectively.

 

Inventory

 

Inventory is valued on a lower of first in, first out (FIFO) cost or net realizable value.

 

Inventory consisted of:

 

Classification

 

June 30, 2019

   

December 31, 2018

 

Raw materials

  $ 46,885     $ 17,610  

Finished products

    199,936       85,532  

Total Inventory

  $ 246,821     $ 103,142  

 

Of the total inventory balance, the Company had $26,326 classified as a current asset, a portion of which was shipped to customers and a portion ready for shipment, however, due to Covid-19 restrictions, remains on hold. The remaining inventory is classified as a non-current asset on the accompanying consolidated balance sheet. This inventory is considered slow moving but it is not obsolete, and no impairment is required. During the three and six months ended June 30, 2019, the Company recognized an impairment charge of $4,003 and $10,286, respectively, which is included in cost of sales. There were no impairment charges taken during the three and six months ended June 30, 2018.

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets ranging from three to ten years.

 

Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.

 

Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

 

Impairment of Long-lived Assets

 

Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.

 

If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

Accounting for Derivatives

 

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense).

 

 

Upon conversion of a note where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at fair value, relieves all related notes, derivatives, and debt discounts, and recognizes a net gain or loss on extinguishment.  Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.

 

The company has adopted FASB ASU 2017-11, which simplifies the accounting for certain equity-linked financial instruments and embedded features with down round features that reduce the exercise price when the pricing of a future round of financing is lower. This allows the company to treat such instruments or their embedded features as equity instead of considering them as a derivative. If such a feature is triggered the value is measured pre-trigger and post-trigger. The difference in these two measurements is treated as a dividend, reducing income. The value recognized as a dividend is not subsequently remeasured, but in instances where the feature is triggered multiple times each instance is recognized.

 

Convertible Notes with Fixed Rate Conversion Options

 

The Company may enter into convertible notes, some of which may contain fixed rate conversion features, whereby the outstanding principal and accrued interest may be converted, by the holder, into common shares at a fixed discount to the price of the common stock at the time of conversion. The Company measures the fair value of the notes at the time of issuance, which is the result of the share price discount at the time of conversion and records the premium to interest expense on the note issuance date.

 

Beneficial Conversion Features

 

For instruments that are not considered liabilities under ASC 480 or ASC 815, the Company applies ASC 470-20 to convertible securities with beneficial conversion features that must be settled in stock. ASC 470-20 requires that the beneficial conversion feature be valued at the commitment date as the difference between the effective conversion price and the fair market value of the common stock (whereby the conversion price is lower than the fair market value) into which the security is convertible, multiplied by the number of shares into which the security is convertible limited to the amount of the loan. This amount is recorded as a debt discount and amortized to interest expense in the Consolidated Statements of Operations.

 

Debt Issue Cost

 

Debt issuance cost paid to lenders, or third parties are recorded as debt discounts and amortized to interest expense in the Consolidated Statements of Operations, over the life of the underlying debt instrument.

 

Revenue Recognition and Concentrations

 

Effective January 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers” to recognize revenues from the sale of agricultural biotechnology products to distributors and customers. There was no cumulative effect of adopting ASC 606.

 

Pursuant to ASC 606, we recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration or payment the Company expects to be entitled to receive in exchange for those goods or services. Our revenue is recognized by applying the following five steps: 1) identify the contracts with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when (or as) we satisfy a performance obligation.

 

We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit or financial information pertaining to the customer. If a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation. We determine the transaction price based on the consideration which we will be entitled to receive in exchange for transferring goods or services to our customer. We recognize revenue at the time that the related performance obligation is satisfied by transferring the promised goods or services to our customer.

 

 

Revenue for agricultural biotechnology products is recognized when title to the product is transferred which may be upon shipment to or receipt by the customer of the product.

 

Amounts billed to customers for shipping and handling fees are included in net sales, and costs incurred by the company for the delivery of invoiced goods are classified as cost of goods sold in our Statements of Operations.

 

Determination of the reserve for estimated product returns and allowances is based on management's analyses and judgments regarding certain conditions. Should future changes in conditions prove management's conclusions and judgments on previous analyses to be incorrect, revenue recognized for any reporting period could be materially affected.

 

The Company determined that no reserve for estimated product returns and allowances was necessary during the three and six months ended June 30, 2019 and 2018.

 

During the three and six months ended June 30, 2019, one customer accounted for 0% and 87% of net sales, respectively. During the three and six months ended June 30, 2018, one customer accounted for 68% of net sales.

 

Cost of Sales

 

Cost of sales represents costs directly related to the production, manufacturing and freight-in of the Company’s product inventory purchased from third-party manufacturers as well as royalty expense and any declines in inventory values.

 

Research and Development

 

Research and development costs are charged to expense as incurred.

 

For the three and six months ended June 30, 2019, the Company recognized $63,891 and $64,962 in research and development costs in the consolidated statements of operations.

 

For the three and six months ended June 30, 2018, the Company recognized $16,710 and $101,451 in research and development costs in the consolidated statements of operations.

 

Warranty Expense

 

The Company's distribution agreements provide for a warranty on products sold. Sales under such distribution agreements have been nominal during the three and six months ended 2019 and 2018, respectively.

 

A provision for estimated future warranty costs is to be recorded as a component or cost of sales when products are shipped, and warranty costs are to be based on historical trends in warranty charges as a percentage of gross product shipments. A resulting accrual is to be reviewed regularly, and periodically adjusted to reflect changes in warranty cost estimates. There has been no related warranty expense accrued during the three and six months ended June 30, 2019 and 2018, respectively.

 

Income Taxes

 

The Company accounts for income tax using the asset and liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of June 30, 2019, and December 31, 2018, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the three and six months ended June 30, 2019 and 2018.

 

 

Advertising Costs

 

Advertising costs are expensed as incurred.  Advertising costs are included as a component of general and administrative expense in the consolidated statements of operations.

 

The Company recognized $8,794 and $0 in marketing and advertising costs during the three months ended June 30, 2019 and 2018, respectively and $44,904 and $1,897 in marketing and advertising costs during the six months ended June 30, 2019 and 2018, respectively, which is included in general and administrative expense in the accompanying consolidated statements of operations.

 

Accounting for Leases

 

In March 2016, the FASB issued ASU No. 2016-02, Leases. The main difference between the provisions of ASU No. 2016-02 and previous GAAP is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU No. 2016-02 retains a distinction between finance leases and operating leases, and the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use assets and lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for public business entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted as of the beginning of any interim or annual reporting period. The Company’s adoption January 1, 2019 did not have a material impact on the consolidated financial statements.

 

The Company leases its office, building and laboratory space under separate short term leases (month-to-month) with no long term commitment.  The Company has no capitalizable right of use assets or liabilities. 

 

The Company incurred rent expense of $117,432 and $106,900 for the six months ended June 30, 2019 and 2018, respectively.  These amounts are included as a component of general and administrative expenses.

 

Stock-Based Compensation

 

The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the consolidated financial statements which is measured based on the grant date fair value of the award. Stock based compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model using the simplified method to determine the term.

 

Costs equal to these fair values are recognized ratably over the requisite service period based on the number of awards that are expected to vest, or in the period of grant for awards that vest immediately and have no future service condition. The expense resulting from employee and share-based payments is recorded in general and administrative expense in the three and six months ended June 30, 2019 and 2018.

 

The Company also grants share-based compensation awards to non-employees for service provided to the Company. The Company measures and recognizes the fair value of such transactions based on the fair value of consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

 

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU No 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. This guidance is applicable to the Company’s fiscal year beginning January 1, 2019. The implementation did not have a material effect on its consolidated financial statements.

 

 

Basic and Diluted Earnings (Loss) per Share

 

Pursuant to ASC 260-10-45, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the periods presented. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

 

Potentially dilutive common shares consist of common stock issuable for stock options and warrants (using the treasury stock method), convertible notes and common stock issuable.

 

The following potentially dilutive equity securities outstanding as of June 30, 2019 and 2018 were not included in the computation of diluted loss per common share because the effect would have been anti-dilutive:

 

   

June 30, 2019

   

June 30, 2018

 
                 

Convertible notes payable (exercise price $0.59 - $2/share)

    8,124,861       1,487,291  

Warrants (exercisable - $0.50 - $6/share)

    19,603,785       12,145,665  

Stock options (vested - $1.25 - $3/share)

    1,685,000       1,880,000  

Total common stock equivalents

    29,413,646       15,512,956  

 

Two of the convertible notes payable contain exercise prices that have a discount to market equal to 65% of the market price (See Note 4(D)).  As a result, the amount computed for common stock equivalents could change given the quoted closing trading price at each reporting period.

 

Investments

 

We have an equity investment in a privately held entity. We account for investments either under the equity method or cost method of accounting depending on our ownership interest and the level of our influence in each joint venture. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee's income or loss. Cost method investments are recorded at cost less any impairments. All investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. All investments were carried at a zero value as of June 30, 2019 and December 31, 2018 (See Note 5).

 

Recent Accounting Standards

 

Changes to accounting principles are established by the FASB in the form of ASU’s to the FASB’s Codification. We consider the applicability and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ deficit, cash flows, or presentation thereof.

 

Management has considered all recent accounting pronouncements and believes that these recent pronouncements will not have a material effect on the company’s financial statements.

 

 

 

Note 3 – Property and Equipment

 

Property and equipment consisted of the following:

 

                   

Estimated Useful

 
   

June 30, 2019

   

December 31, 2018

   

Lives (Years)

 
                           

Furniture and equipment

  $ 151,796     $ 151,796     3 - 10  

Leasehold improvements

    7,593       7,593       10    
      159,389       159,389            

Accumulated depreciation

    (85,983 )     (73,866 )          

Total propery and equipment - net

  $ 73,406     $ 85,523            

 

Depreciation expense for the three months ended June 30, 2019 and 2018 was $5,786 and $6,190, respectively.

 

Depreciation expense for the six months ended June 30, 2019 and 2018 was $12,117 and $12,425, respectively.

 

Depreciation expense is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.

 

 

Note 4 – Debt

 

The Company has various debt arrangements with third parties and related parties. The following represents a summary of the Company’s debt, key terms and outstanding balances at June 30, 2019 and December 31, 2018, respectively:

 

 

A.

Series A and B Convertible Notes Payable, Convertible Notes Payable – Related Parties and Warrants

 

Series A and B Debt

 

In May 2019, the Company offered new convertible notes to its existing debt holders. Under the terms of the arrangement, all debt holders could exchange their outstanding debt and accrued and unpaid interest for new 10% Series A Secured Convertible Promissory Notes (“Series A Note”). The Company did not receive additional cash proceeds upon conversion of the existing debt into Series A Notes. The amount of existing debt and related accrued interest converted into Series A Notes was $6,029,275. The transaction was accounted for as a debt extinguishment and the Company recorded a loss on debt extinguishment of approximately $650,000. The loss on debt extinguishment has been included as a component of interest expense in the accompanying consolidated statements of operations. Upon conversion, Series A Note holders, at their option, could exchange up to fifty percent (50%) of their Series A Notes as partial consideration paid for a 12% Series B Secured Convertible Promissory Notes (“Series B Note”), by matching the amount of Series A Notes converted with an equal amount in cash.

 

In connection with the Series B round, the Company recognized gross proceeds of $3,062,427.  The Company also paid related commissions totaling $99,645 (accounted for as a debt discount), resulting in net proceeds of $2,962,782.

 

Series A and B Warrants

 

In connection with the Series A and B rounds, debt holders also received fully vested, non-forfeitable warrants. 

 

The Company issued a total of 9,499,600 warrants (See Note 6). Of the total, 3,045,600 were for Series A in exchange for the same quantity of existing warrants held by the debt holders related to the old debt with additional warrants being issued for the capitalized interest, and 6,454,000 were for newly issued Series B debt. Of the Series A warrants, 2,548,200 were issued to related parties, and of the of the Series B warrants, 5,421,400 were issued to related parties.

 

Under Series A and B, the warrants are exercisable for three (3) years, at $1/share through April 1, 2020, and then, for the Series B warrants, the exercise price is reduced to $0.50 for any warrants exercised after April 1, 2020.  No such exercises have occurred either before of after April 1, 2020, in relation to Series A or B debt holders and their related warrants. 

 

All relative fair values for warrants issued in connection with Series A and B are treated as a debt discount, computed based on a Black-Scholes option pricing model. 

 

The inputs used to compute the fair value of the warrants of which the relative fair values are based were as follows:

 

Exercise price   $ 1  
         
Expected term (in years)     3  
         
Expected volatility     103 %
         
Expected dividends     0 %
         
Risk free interest rate     2.3 %

 

 

Series A Debt Summary:

 

   

Series A, 10%

   

Series A, 10%

 
   

Convertible Notes

   

Convertible Notes

 

Terms

 

Related Parties

   

Third Parties

 
                 

Issuance dates of notes

 

 

May 2019    

 

May 2019  

Term (in years)

    3       3  

Maturity dates

 

 

May 2022    

 

May 2022  

Interest rate

    10%       10%  
Collateral (Series A is subordinated to Series B)     All assets       All assets  

Conversion price

    $2       $2  

Prepayment penalty (P&I)

 

 

None    

 

None  

 

Note Date

 

May 2019

   

May 2019

   

Total

 
                         

Principal

  $ 2,548,200     $ 621,300     $ 3,169,500  
                         

Quantity of warrants

    2,548,200       497,400       3,045,600  

Warrants/Fees - debt discount (Black-Scholes)

  $ 1,510,487     $ 298,561     $ 1,809,048  
                         

Balance - December 31, 2018

  $ -     $ -     $ -  

Conversion from prior debt into Series A

    4,889,001       850,000       5,739,001  

Conversion of accrued interest into Series A

    127,480       162,794       290,274  

Conversion of deferred revenue into Series A

    206,800       -       206,800  

Conversion from Series A into Series B

    (2,675,079 )     (391,494 )     (3,066,573 )

Warrant debt discount recorded for new notes

    (1,510,487 )     (298,561 )     (1,809,048 )

Amortization of debt discount

    78,869       16,373       95,242  

Balance - June 30, 2019

  $ 1,116,584     $ 339,112     $ 1,455,696  

 

 

Series B Debt Summary:

 

   

Series B, 12%

   

Series B, 12%

 
   

Convertible Notes

   

Convertible Notes

 

Terms

 

Related Parties

   

Third Parties

 
                 

Issuance dates of notes

 

 

May 2019    

 

May 2019  

Term (in years)

    3       3  

Maturity dates

 

 

May 2022    

 

May 2022  

Interest rate

    12%       12%  

Collateral (Series A is subordinated to Series B)

 

 

All assets    

 

All assets  

Conversion price

    $1       $1  

Prepayment penalty (P&I)

 

 

None    

 

None  

 

Note Date

 

May 2019

   

May 2019

   

Total

 
                         

Principal

  $ 5,096,400     $ 1,032,600     $ 6,129,000  
                         

Quantity of warrants

    5,421,400       1,032,600       6,454,000  

Warrants/Fees - debt discount (Black-Scholes)

  $ 3,184,793     $ 645,289     $ 3,830,082  
                         

Balance - December 31, 2018

  $ -     $ -     $ -  

Proceeds

    2,299,927       762,500       3,062,427  

Conversion from Series A into Series B

    2,796,473       270,100       3,066,573  

Warrant and BCF debt discount recorded for new notes

    (5,096,400 )     (1,032,600 )     (6,129,000 )

Amortization of debt discount

    266,104       56,013       322,117  

Balance - June 30, 2019

  $ 266,104     $ 56,013     $ 322,117  

 

 

 

B.

Notes Payable

 

Terms

 

Note Payable

   

Note Payable

 

Note Payable

                   

Issuance dates of notes

 

 

December 2017    

 

January 2018  

March 2019

Term (in years)

    2       2  

None

Maturity dates

 

 

December 2019    

 

January 2020  

Due on Demand

Interest rate

    10%       10  

None

Collateral

 

 

Unsecured    

 

Unsecured  

Unsecured

 

Note Date

 

December 2017

   

January 2018

   

March 2019

   

Total

 
                                 

Principal

  $ 200,000     $ 100,000     $ 100,000     $ 400,000  
                                 

Quantity of warrants

    50,000       10,000       -       60,000  

Warrants/Fees - debt discount (Black-Scholes)

  $ 18,652     $ 7,124     $ -     $ 25,776  
                                 

Balance - December 31, 2017

  $ 181,348     $ -     $ -     $ 181,348  

Proceeds

    -       100,000       -       100,000  

Debt discount recorded for new notes

    -       (7,124 )     -       (7,124 )

Amortization of debt discount

    9,760       3,387       -       13,147  

Balance - December 31, 2018

    191,108       96,263       -       287,371  

Proceeds

    -       -       50,000       50,000  

Repayments

    -       -       (50,000 )     (50,000 )

Amortization of debt discount

    8,892       3,737       -       12,629  

Conversion to Series A, 10%, convertible notes payable

    (200,000 )     (100,000 )     -       (300,000 )

Balance - June 30, 2019

  $ -     $ -     $ -     $ -  

 

 

 

C.

Notes Payable – Related Parties

 

   

Notes Payable

   

Notes Payable

   

Notes Payable

 

Terms

 

Related Parties

   

Related Parties

   

Related Parties

 
                                 

Issuance dates notes

 

 

August 2017 - October 2017    

 

January 2018 - May 2018    

April 2019

 

Term (in years)

      2           2      

None

 

Maturity dates

 

 

July 2020    

 

March 2018 - May 2020    

Due on Demand

 

Interest rate

      10%   %       10%      

None

 

Collateral

 

 

Unsecured    

 

Unsecured    

Unsecured

 

 

Note Date

 

August 2017 - October

2017

   

January 2018 - May

2018

   

April 2019

   

Total

 
                                 

Principal

  $ 1,100,000     $ 1,300,001     $ 789,000     $ 3,189,001  
                                 

Quantity of warrants

    110,000       75,000       325,000       510,000  

Warrants/Fees - debt discount (Black-Scholes)

  $ 112,830     $ 125,433     $ 185,629     $ 423,892  
                                 

Balance - December 31, 2017

  $ 1,002,204     $ -     $ -     $ 1,002,204  

Proceeds

    -       1,300,001       -       1,300,001  

Debt discount recorded for new notes

    -       (125,433 )     -       (125,433 )

Amortization of debt discount

    56,417       69,053       -       125,470  

Repayments

            (300,000 )     -       (300,000 )

Balance - December 31, 2018

    1,058,621       943,621       -       2,002,242  

Proceeds

    -       -       789,000       789,000  

Warrant debt discount recorded for new notes

    -       -       (185,629 )     (185,629 )

Amortization of debt discount

    40,593       56,380       185,629       282,602  

Conversion to Series A, 10%, convertible notes payable

    (1,000,000 )     (1,000,001 )     (789,000 )     (2,789,001 )

Balance - June 30, 2019

  $ 99,214

*

  $ -     $ -     $ 99,214  

 

* Amount was repaid in August 2019.

 

 

 

D.

Convertible Notes Payable and Derivative Liability

 

   

Convertible

   

Convertible Note

   

Convertible Note

 

Terms

 

Notes

   

(Derivative Liability)

   

(Derivative Liability)

 
                         

Issuance dates of notes

 

July 2018

   

December 2018

   

January 2019

 

Term

 

2 years

   

9 months

   

8 months

 

Maturity dates

 

July 2020

   

September 2019

   

September 2019

 

Interest rate

  10%     8%     8%  

Collateral

 

Unsecured

   

Unsecured

   

Unsecured

 

Conversion price

  $3    

Lower of $3 or 65% of market price

   

Lower of $3 or 65% of market price

 

 

Note Date

 

July 2018

   

December 2018

   

January 2019

   

Total

 
                                 

Principal

  $ 550,000     $ 136,000     $ 104,500     $ 790,500  
                                 

Quantity of warrants

    550,000       100,000       100,000       750,000  

Warrants/Fees - debt discount (Black-Scholes)

  $ 244,549     $ 136,000     $ 94,500     $ 475,049  
                                 

Balance - December 31, 2017

  $ -     $ -     $ -     $ -  

Proceeds

    550,000       136,000       -       686,000  

Debt discount recorded for new notes

    (244,549 )     (136,000 )     -       (380,549 )

Amortization of debt discount

    51,343       8,947       -       60,290  

Balance - December 31, 2018

    356,794       8,947       -       365,741  

Proceeds

    -       -       94,500       94,500  

Debt discount recorded for new notes

    -       -       (94,500 )     (94,500 )

Amortization of debt discount

    193,206       85,856       56,700       335,762  

Conversion to Series A, 10%, convertible notes payable

    (550,000 )     -       -       (550,000 )

Balance - June 30, 2019

  $ -     $ 94,803

*

  $ 56,700

**

  $ 151,503  
                                 

Penalty classified as additional interest expense

  $ -     $ -     $ 10,000     $ 10,000  

 

* Amount was repaid in September 2019.

** Amount was repaid in October 2019.

 

 

Derivative Liability

 

The above convertible notes for December 2018 and January 2019 contained an embedded conversion option with a conversion price that could result in issuing an undeterminable amount of future shares.  Accordingly, the embedded conversion option is required to be bifurcated from the host instrument (convertible note) and treated as liabilities, which are calculated at fair value, and marked to market at each reporting period.

 

The Company used the Monte Carlo simulation to estimate the fair value of its embedded conversion option liabilities with the following inputs:

 

   

Commitment Date

   

Remeasurement Date

   

Remeasurement Date

 
                         

Convertible Note Date

 

December 11, 2018

   

December 31, 2018

   

June 30, 2019

 

Maturity date

 

August 11, 2019

   

August 11, 2019

   

August 11, 2019

 
                         

Expected term (years)

    0.67       0.61       0.12  

Expected volatility

    117 %     149 %     138 %

Expected dividends

    0 %     0 %     0 %

Risk free interest rate

    2.56 %     2.63 %     2.18 %
                         

Fair value

  $ 125,000     $ 114,000     $ 126,000  

 

 

   

Commitment Date

   

Remeasurement Date

 
                 

Convertible Note Date

 

January 14, 2019

   

June 30, 2019

 

Maturity date

 

October 14, 2019

   

October 14, 2019

 
                 

Expected term (years)

    0.75       0.29  

Expected volatility

    130 %     150 %

Expected dividends

    0 %     0 %

Risk free interest rate

    2.55 %     2.12 %
                 

Fair value

  $ 89,000     $ 90,000  

 

 

The following is a summary of the Company’s derivative liabilities for the six months ended June 30, 2019 and the year ended December 31, 2018:

 

Convertible Note Date

 

December 11, 2018

   

January 14, 2019

   

Total

 
                         

Derivative liability - December 31, 2017

  $ -     $ -     $ -  

Fair value at commitment date

    125,000       -       125,000  

Fair value mark to market adjustment

    (11,000 )     -       (11,000 )

Derivative liability - December 31, 2018

    114,000       -       114,000  

Fair value at commitment date

    -       89,000       89,000  

Fair value mark to market adjustment

    12,000       1,000       13,000  

Derivative liability - June 30, 2019

  $ 126,000     $ 90,000     $ 216,000  

 

 

 The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. Liabilities measured at fair value on a recurring basis consisted of the following at June 30, 2019 and December 31, 2018:

 

           

Quoted Prices in

   

Significant Other

   

Significant

 
           

Active Markets for

   

Observable

   

Unobservable

 
           

Identical Assets

   

Inputs

   

Inputs

 
   

June 30, 2019

   

(Level 1)

   

(Level 2)

   

(Level 3)

 
                                 

Derivative liabilities

  $ 216,000     $ -     $ -     $ 216,000  

 

 

           

Quoted Prices in

   

Significant Other

   

Significant

 
           

Active Markets for

   

Observable

   

Unobservable

 
           

Identical Assets

   

Inputs

   

Inputs

 
   

December 31, 2018

   

(Level 1)

   

(Level 2)

   

(Level 3)

 
                                 

Derivative liabilities

  $ 114,000     $ -     $ -